Trump Tax Plan Doesn't Solve Tech's Multibillion-Dollar Overseas-Cash Problem

By Yoree Koh Features Dow Jones Newswires

President Donald Trump's tax-cut proposals could miss the mark for the tech industry.

Continue Reading Below

The key issue for some of the biggest names in tech, the one-time tax rate on stockpiles of cash stashed overseas, remained unanswered by the president's tax plan announced Wednesday. But Mr. Trump's plan to slash the corporate tax rate to 15% could be good news for startups.

Over the years, many of the tech giants have found ways to lower their tax rate to well below the statutory rate of 35%, often by booking profits in low-tax countries and leaving the money there. Twenty information technology companies on the S&P 500 had an effective annual tax rate of 20% or lower, including Facebook Inc. and Google parent Alphabet Inc., according to S&P Global Market Intelligence. Only six technology companies paid an effective annual tax rate that was 35% or higher.

For the tech giants, the cut to the corporate tax rate isn't "that big of a deal to them since they're not paying it anyway," said Lawrence A. Zelenak, a Duke University law professor who specializes in tax policy. "The biggest issue that kind of dwarfs everything else is how this affects the big piles of cash held offshore." President Trump's plan didn't provide clarity on the repatriation of cash overseas.

Officials did say there would be a one-time tax on accumulated foreign profits and that companies would likely get multiple years to pay it to prevent liquidity concerns. Mr. Trump campaigned on a 10% rate. House Republicans proposed lower rates and a two-tiered system for cash and other profits.

U.S.-based companies can keep foreign earnings abroad, allowing them to avoid the 35% U.S. tax until they bring that money home. Under the new tax plan, U.S. companies would owe little or no tax on their future foreign profits.

Continue Reading Below

Apple Inc., which earns about two-thirds of its revenue outside the U.S., is holding more than $230 billion in cash overseas. Microsoft Corp. said in its most recent quarterly report that the bulk of its cash, about $116 billion out of a global total of $123 billion, is housed overseas and "would be subject to material repatriation tax effects."

The companies have indicated that they would like to bring that cash home. During a 2013 hearing on the U.S. tax code, Apple Chief Executive Tim Cook urged senators to adopt "a reasonable tax on foreign earnings" that would encourage companies to bring profits back to the U.S. He said such changes would boost the economy and create jobs.

Recent policy conversations have focused less on incentives and more on a one-time tax on all accumulated profits to clear the decks for the new system in which companies can bring foreign profits home tax-free as they earn them.

Economists say Congress could set that one-time rate quite high because it would have no negative-incentive effects.

In January, Mr. Cook expressed optimism that Congress would enact a tax overhaul this year, allowing Apple to repatriate much of the cash it holds overseas. The company has indicated it could use that money for acquisitions or shareholder dividends and stock buybacks. Alphabet and Apple didn't respond to requests for comment.

Still, tax experts say a lower corporate tax rate could help smaller tech startups that are strapped for cash in the early years. Coupled with an existing tax credit on research and experimentation, it could even push the tax rate low enough to appeal to some of the bigger companies, said Ian Boccaccio, a principal at Dallas-based tax consulting firm Ryan LLC.

Tripp Mickle contributed to this article.

Write to Yoree Koh at yoree.koh@wsj.com

(END) Dow Jones Newswires

April 27, 2017 09:14 ET (13:14 GMT)